Israel’s bond market has started the new year with a bang, as several issuers have tapped the private placement (PP) market for funding. The PP market, which offers tailor-made solutions for borrowers and investors, has been growing in popularity in Israel in recent years, especially among small and medium-sized enterprises (SMEs) and non-bank financial institutions.
One of the main reasons why PPs are appealing for Israeli issuers is the flexibility they offer in terms of structure, pricing, and documentation. PPs can be customized to suit the specific needs and preferences of both the borrower and the lender, allowing for more efficient and effective financing.
Another reason is the lower cost of funding compared to the public bond market. PPs typically have lower interest rates, fees, and commissions than public bonds, as they do not require rating agencies, underwriters, or extensive disclosure. PPs also have longer maturities, ranging from five to 15 years, which can help issuers extend their debt profile and reduce refinancing risk.
A third reason is the access to a diverse and loyal investor base. PPs are mainly bought by institutional investors, such as insurance companies, pension funds, and mutual funds, who are looking for long-term and stable returns. These investors tend to have a deeper understanding of the issuer’s business and credit quality, and are more willing to support them in times of market volatility or stress.
Who are the recent PP issuers in Israel?
In the first week of 2024, several Israeli issuers have announced or completed PPs, raising a total of over 1 billion shekels ($300 million). Some of the notable deals are:
- Shikun & Binui, a leading construction and infrastructure company, raised 400 million shekels ($120 million) in a PP deal with four institutional investors. The deal consists of two series of bonds, one with a 10-year maturity and a 2.9% interest rate, and the other with a 15-year maturity and a 3.2% interest rate. The proceeds will be used to refinance existing debt and for general corporate purposes.
- Mizrahi Tefahot Bank, the fourth-largest bank in Israel, issued 300 million shekels ($90 million) of subordinated bonds in a PP deal with two institutional investors. The bonds have a 10-year maturity and a 3.4% interest rate, and are eligible for Tier 2 capital. The deal is part of the bank’s plan to strengthen its capital adequacy ratio and comply with the Basel III regulations.
- Shapir Engineering and Industry, a diversified industrial group, sold 200 million shekels ($60 million) of bonds in a PP deal with three institutional investors. The bonds have a 12-year maturity and a 3.1% interest rate, and are secured by a first lien on the company’s assets. The proceeds will be used to finance the company’s growth strategy and diversify its funding sources.
- Electra Consumer Products, a consumer electronics and appliances company, raised 150 million shekels ($45 million) in a PP deal with two institutional investors. The bonds have a seven-year maturity and a 2.8% interest rate, and are backed by a guarantee from the parent company, Electra Ltd. The proceeds will be used to repay bank loans and for working capital needs.
What are the prospects for the PP market in Israel?
The PP market in Israel is expected to remain active and attractive in 2024, as issuers and investors continue to benefit from the advantages of this alternative financing channel. According to a report by the Israel Securities Authority, the PP market in Israel grew by 25% in 2023, reaching a total volume of 23 billion shekels ($6.9 billion). The report also noted that the PP market accounted for 17% of the total corporate bond market in Israel, up from 14% in 2022.
The PP market in Israel is also likely to see more innovation and diversification, as issuers and investors explore new opportunities and niches. For example, some of the emerging trends in the PP market include:
- Green and social bonds: PPs can be used to finance projects that have positive environmental or social impacts, such as renewable energy, affordable housing, or education. In 2023, several Israeli issuers issued green or social bonds in the PP market, such as Netafim, a global leader in drip irrigation, and Shikun & Binui, which issued its second green bond in January 2024.
- Foreign currency bonds: PPs can be denominated in foreign currencies, such as US dollars or euros, to match the issuer’s revenue streams or hedge against currency risk. In 2023, several Israeli issuers issued foreign currency bonds in the PP market, such as Israel Electric Corporation, which issued $500 million of bonds in US dollars, and Delek Group, which issued €300 million of bonds in euros.
- Hybrid bonds: PPs can combine features of both debt and equity, such as convertible or exchangeable bonds, to offer more flexibility and optionality for issuers and investors. In 2023, several Israeli issuers issued hybrid bonds in the PP market, such as Cellcom, the largest mobile operator in Israel, which issued 600 million shekels ($180 million) of convertible bonds, and Melisron, a leading real estate company, which issued 400 million shekels ($120 million) of exchangeable bonds.